Sterling Bridge Mortgage Corp v Flights Development Corporation, 2021 ABQB 990

Court of Queen’s Bench of Alberta Citation: Sterling Bridge Mortgage Corp v Flights Development Corporation, 2021 ABQB 990 Date: 20211215 Docket: 1501 06943 Registry: Calgary Between: Sterling Bridge Mortgage Corp Plaintiff - and - Flights Development Corporation, Vigneswaran Sinnathamby and Sathiya Sinnathamby Defendants _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice C.M. Jones _______________________________________________________ I.

Introduction [ 1 ] This case requires the Court to determine what amounts, if any, are payable by a borrower to a lender under loan arrangements that were never finalized to the point where advances were made. II. Facts [ 2 ] The Plaintiff, Sterling Bridge Mortgage Corp. (“Sterling”), provided commercial syndicated mortgages and loans to real estate developers. Its principal contact was Frank McGinn (“McGinn”). [ 3 ] The corporate Defendant, Flights Development Corporation (“Flights”), is a land development company.

Flights’ principals are the individual Defendants, Vigneswaran Sinnathamby (“Vigneswaran”) and Sathiya Sinnathamby (“Sathiya”). [ 4 ] In August 2014, Sterling and Flights began discussions respecting a loan (Loan). Flights owned a 9.92 acre parcel of land in north east Calgary (Lands). Flights had agreed to sell a portion of the Lands (Arrivals Lands) to Crystal Creek Homes Inc. (Crystal Creek). [ 5 ] Flights had an existing mortgage of $4,200,000 on the Lands with Alta West Capital (the “Alta West Mortgage”). The Loan would allow Flights to refinance the Alta West Mortgage.

It would also allow Flights to complete subdivision and servicing of the Lands (Project).

A. First Commitment Letter [ 6 ] The parties executed a commitment letter on September 25, 2014 (the “First Commitment Letter”). The First Commitment Letter provided that the Loan amount would be $8,500,000, directing $4,200,000 to the payout of the Alta West Mortgage and providing $4,300,000 towards the servicing of a townhouse project. [ 7 ] Under the First Commitment Letter, Vigneswaran and Sathiya both provided unlimited personal guarantees of Flights’ indebtedness to Sterling. [ 8 ] The interest rate was 9.5% and term of the Loan was sixteen months from the date of the Initial Advance.

The Initial Advance was defined to be $4,500,000, being the amount required to refinance the Lands. [ 9 ] Clause 8.

a) of the First Commitment Letter, entitled “Costs and Expenses”, provided: Whether or not the Loan closes, or the Advance is made, the Borrower will be responsible for, and shall pay on demand, all expenses and costs incurred by the Lender in connection with the Loan including, but without limitation, in respect of any structural engineering, environment consultants or reports, completing or obtaining any audits, credit reports, appraisals, insurance consultant review or surveys and any legal expenses on a solicitor and his own client basis, including without limitation, the preparation of all legal documentation including without limitation documentation relating to the syndication of the Loan, and out-of-pocket expenses relating to registration fees and other filing fees and all costs associated with the preservation, maintenance and enforcement of the Lender’s rights in respect of this Loan or in respect of any security granted in favour of the Lender under the Loan and Security Documents (the “Expenses”). [ 10 ] It is common ground that this clause obligated Flights to reimburse Sterling for certain costs and expenses, even if the parties could not arrive at an agreement or no portion of the Loan was ever advanced.

There is also general consensus that, at some point, likely as of January 31, 2015, Flights ceased to be responsible for costs that Sterling continued to incur in its attempts to finalize the Loan. [ 11 ] Further fees were contemplated by clause 8.

b) which provides in part: The Borrower will pay the Lender a fee in the amount of $170,000 or Two percent (2.00%) of the maximum principal amount to be made available by the Lender pursuant to this Commitment Letter (the “Initial Fee”) and a further fee equal to 1% of the amount of the Loan then outstanding as of the date which is the first day of the month after the initial 16 months of the Term have elapsed (the “Supplementary Fee”) (the Initial Fee and the Supplementary Fee are collectively, the “Commitment Fee”).

The Initial Fee shall be fully earned and payable upon the Borrower and the Guarantors signing this Commitment Letter. The Supplementary Fee shall be deemed to be earned on the date which is the first day of the month after the initial 16 months of the Term have elapsed to the extent any portion of the Loan remains unpaid on that date.

The Lender may in its sole discretion allow the Initial Fee to be paid at the time of making the Initial Advance to the Borrower, and is in addition to the Expenses. [Emphasis added.] In the event that the Initial Advance is not made by the Lender as a result of due diligence undertaken by the Lender being unsatisfactory to the Lender or as a result of the Borrower’s or the Guarantors’ failure to fulfill its or their obligations hereunder or under the balance of the Loan and Security Documents (as such term is defined below) then the Initial Fee (less any amount prepaid including as a result of the application towards the Commitment Fee or the Application Fee) will be payable to the Lender on demand.

For further clarity, the Initial Fee shall be payable by the Borrower to the Lender in each of the following circumstances: (

i) If, because of the Borrower’s failure or inability for any reason whatsoever to comply with any terms or conditions in this Commitment Letter, the Borrower has not requested and received the Initial Advance by the Commitment Expiry Date (as defined below); or (ii) If, for any reason, the Borrower does not accept all or a portion of the proceeds of the Loan when the Lender makes them available; or (iii) If the Borrower enters into a loan commitment with another party or receives alternate financing from another lender respecting the Property without the Lender’s consent; or (iv) If the Borrower fails, refuses or is unable to comply with any of the terms and conditions as set forth in this Commitment Letter and/or in the Loan and Security Documents. ...

A non-refundable Application Fee of $10,000 (the “Application Fee”) has been paid to the Lender by the Borrower, and which Application Fee the Borrower acknowledges is fully earned. The Application Fee, however, will be refunded should the Lender not be able to subscribe monies sufficient to meet the funding requirements of the Loan. The payment of the Application Fee shall reduce the Commitment Fee owing. [ 12 ] The Commitment Expiry Date was October 31, 2014.

Clause 15 of the First Commitment Letter provided: In the event the Loan and Security Documents are not registered and in place, all funding conditions satisfied and the Initial Advance has not occurred on or before October 31, 2014 (the “Commitment Expiry Date”), this Commitment shall, at the option of the Lender, expire and be of no force and effect. [ 13 ] Finally,

section 16 of

Schedule D to the First Commitment Letter addressed the possibility that Sterling would be unable to syndicate the Loan: The Borrower and the Guarantor (to the extent applicable) acknowledge and agree that the Lender shall only be able to advance funds

from time to time to the Borrower as contemplated in this Commitment Letter in the event the Lender is able to complete a syndication of the Loan, including, without limitation, completing such syndication on terms and with investors satisfactory to it in its sole discretion, prior to the making of any such advance. The completion of such syndication of the Loan is a condition precedent for the sole benefit of the Lender which must be satisfied in a manner which is satisfactory to the Lender in its sole discretion prior to the Lender making any or all advance of funds to the Borrower from time to time.

This condition precedent may only be waived by the lender providing directly to the Borrower the Lender’s express prior written confirmation of such waiver.

In the event the Lender is unable to make any or all advances from time to time to the Borrower as contemplated in this Commitment Letter as a result of its inability to satisfy the foregoing condition, the Lender shall not be liable for, and the Borrower hereby releases the Lender of and from, any an all actions, causes of action, claims, counterclaims, demands, damages (including indirect or consequential damages) interest, costs, expenses and compensation of whatever kind and howsoever arising, whether known or unknown, which the Borrower may suffer or incur in any way arising or resulting therefrom. [ 14 ] In

summary, Flights agreed to the following terms in the First Commitment Letter: (

a) An $8,500,000 Loan; (

b) An interest rate of 9.50%; (

c) A term of 16 months from the date of the Initial Advance; (

d) A $10,000 Application Fee; and (

e) An Initial Fee of $170,000 calculated as 2% of the amount of the Loan. B. Subsequent Negotiations [ 15 ] The Commitment Expiry Date came and went. I review how subsequent interactions between the parties evolved. The nature and extent of these interactions shed light on the parties’ objective intentions, as they relate to the presence or absence of any continuing agreement. [ 16 ] The three requirements set forth in clause 15 of the First Commitment Letter were not met by the Commitment Expiry Date. In particular, it is common ground that Sterling had not secured underwriting for the Loan by that date.

Nevertheless, the parties continued to work toward a deal.

There is no evidence that Sterling exercised its option to let the Commitment expire. [ 17 ] On October 31, 2014, McGinn sent an email to Alta West Capital advising that “we would think by mid November we should be ready”. [ 18 ] On November 3, 2014, McGinn sent an email to Sathiya advising that Sterling’s quantity surveyor thought that Flights’ budget for the Project was $1,000,000 too low. [ 19 ] On November 13, 2014, a mortgage was registered against the Lands in favour of Sterling. [ 20 ] On December 10, 2014, Sathiya sent an email to McGinn and Keith Prosser, the president of Sterling, advising that Flights and Crystal Creek had agreed on a price for the Arrivals Lands and that Flights was attempting to provide Sterling with updated budget numbers. [ 21 ] McGinn responded by email on December 11, 2014, advising that, given the increased cost for the Project, the Commitment would have to be revised.

He also advised that an additional $500,000 of equity would need to be injected. [ 22 ] On December 15, 2014, McGinn advised Sathiya that Sterling had increased the amount of the Loan from $8,500,000 to $9,000,000 with the amount needed to pay out the Alta West Mortgage increasing from $4,200,000 to $4,300,000. [ 23 ] On January 7, 2015, McGinn sent an email to Sathiya and to Alan Nessick of Tech-Cost Consultants Ltd (Sterling’s quantity surveyor) (Tech-Cost), proposing further changes to the terms of the Commitment. The Loan would increase to $9,200,000.

Flights’ equity contribution to the Project would increase to $2,833,953 from $2,360,000. [ 24 ] On January 7, 2015, Sathiya replied, enclosing Flights’ most recent budget. She indicated that she thought Enmax’s quote for electrical pre-service and feeder installation was high and that Flights would attempt to get other quotes. [ 25 ] Also on January 7, 2015 McGinn sent an email to Sathiya, to Tech-Cost and to Flights’ budget consultants, Hilco Projects Inc. (“Hilco”), indicating that the Initial Fee would increase to $180,000, being 2% of the higher assumed Loan amount of $9,000,000.

He also expressed concern that the interest reserve had to be increased from $375,000 to $650,000. [ 26 ] Further emails ensued addressing various issues. On January 20, 2015, McGinn responded to Sathiya’s request for an update, advising that, “The REIT is reviewing the revised deal and we are awaiting to hear back from them. They have not raised any major concerns (other than economic) with the revisions. As soon as I hear I will let u know.” [ 27 ] On January 23, 2015, in response to another update request, McGinn advised, “We should have everything resolved next week.

The REIT who agreed to come in changed there [sic] mind with changes and economy. We have arranged with other investor and just need to finalize into next week.” [ 28 ] On January 28, 2015, McGinn emailed Crystal Creek Homes, with a copy to Sathiya: This will confirm that we have the funding in place for the acquisition and development. F.Y.I. we had to change from original investor

as the credit they approved changed. Nevertheless, the new lender has “deep pockets” and we are working with them towards an amended commitment letter. We have proposed an initial funding date of February 20 th . [ 29 ] On February 1, 2015, Sathiya emailed McGinn: Flights and Crystal Creek have been putting resources, manpower and funds into this development project. Before we put more of our time and money in we want confirmation regarding the timing and funding of the Flights Loan. We recognize that you have a new investor which is why we need to have in writing your additional requirements.

If you provide a list of items we will get it completed. [ 30 ] McGinn responded on February 2, 2015, saying only, “Their lending committee is meeting on Thursday so we will wait until then.” [ 31 ] On February 3, 2015, McGinn sent an email to Sathiya setting out a number of “things we need for investors” including financial statements and organizational charts. [ 32 ] On February 5, 2015, Flights’ architect and project manager, Kishan Gajjar (“Kishan”), emailed McGinn, asking “Will it be possible to have a quick phone conversation today with Warren and myself to touch base on the financing status and possible list of things to do?”. [ 33 ] McGinn responded on February 6, 2015 that “I have rec’d favourable verbal response on our revised financing.

I expect to receive written confirmation on Monday and will be able to advise as soon as I hear.” [ 34 ] Later that day, Kishan replied, stating: Thanks for the update Frank. We still wouldn’t mind having a touch base call at some point next week to ensure that some of the finer points about the development don’t get missed out by any of the parties. This way we will be on the same page.

FYI, we are continuing to work towards completing the construction permits for the phase 1 townhouses with Crystal Creek so the subdivision work needs to run parallel with that this spring. [ 35 ] On February 17, 2015, McGinn emailed Sathiya saying, “We are looking at a closing date of March 2 nd . We will be to u shortly.” [ 36 ] On March 4, 2015, Kishan advised McGinn that Flights had given instructions to Curtis Environmental Engineering Inc. to prepare a Phase II environmental assessment. [ 37 ] On March 16, 2015, McGinn sent an email, alluding to a meeting held that morning.

He said, inter alia , that he had discussed the Project budget with Sterling’s co-partners, who had not yet been disclosed to Flights, and that it would be increased by $400,000.

McGinn also mentioned that Crystal Creek’s deposit of $420,000 would be paid to Sterling and that the purchase and sale agreement with Crystal Creek (the “PSA”) would clarify that the deposit would be used to address the additional $400,000 in costs. [ 38 ] On March 19, 2015, Kishan sent an email to Crystal Creek, asking if they would have the PSA amended to include the on-site deep services and to set the purchase value of the Arrivals Lands at $4.2 million.

He also asked Crystal Creek to confirm that its deposit would be used towards construction costs, specifically the deep install and related engineering costs and city fees. Crystal Creek responded, “No problem our lawyer is still working on it and I can confirm that the deposit will be releasable.” [ 39 ] On March 23 and 24, 2015, there was an email exchange among McGinn, Kishan and Vigneswaran in respect of what the parties referred to as the Enmax Recoverable. There was some dispute between the parties as to the nature of this item.

Sterling took the position that it was an expense, while Flights asserted it was an amount previously paid that it was entitled to recover. In the course of the email exchange, McGinn indicated that Sterling could not fund a loan that exceeded a 79% loan to value ratio. That meant that Sterling could not fund an increased Loan amount necessitated by this $527,000 “expense” and that Flights would have to contribute this additional equity. C. Second Commitment Letter [ 40 ] On March 23, 2015, Sterling sent Flights the Second Commitment Letter, which contemplated: (

a) A $9,200,000 Loan; (

b) An interest rate that was not fixed but which, on $6,600,000 of Loan proceeds, would be computed at the greater of 7% or Bank Prime + 4.15%; (

c) A 19-month term; (

d) An Initial Fee of 3.25% of the Loan; (

e) Injection by Flights of $600,000 from the sale of Flights’ property at 16 Wexford Place S.W. Calgary; and (

f) Injection by Flights of $527,000 to cover an alleged cost to complete shortfall created by the Enmax Recoverable. [ 41 ] On April 1, 2015, apparently in response to a communication from Vigneswaran, McGinn sent an email saying: It is obvious that we need a meeting asap. If Sathiya and Kishan are available and you on conference call. I will reiterate the following: #1 executed Purchase sale agreement and $400,000 deposit for use in construction be in hand prior to paying out Alta west.

#2 Equity has to be in first. Kishan mentioned he could have costs reduced with Commitment letter. Provided the reductions can be vetted by QS ok. We can’t take security off properties in Ontario. If u have equity take second mortgages out and get the cash in. #3 The fee is not being charged. [ 42 ] On April 6, 2015, McGinn provided the Quantity Surveyor with an addendum to the PSA and asked him to examine it in connection with the Arrivals Lands.

Specifically, McGinn was concerned that Flights’ additional vendor covenants would increase the costs associated with the Project. [ 43 ] On April 7, 2015, McGinn sent an email to Vigneswaran reiterating, inter alia , that Flights would need to post an additional $527,000 in equity, representing the Enmax Recoverable, and that the PSA needed to be amended to change the closing date to 120 days after issuance of a building permit, to provide that Crystal Creek’s $420,000 deposit needed to be paid to Sterling Bridge Trust to be used to pay additional costs shown on the Quantity Surveyor’s March Budget and to remove Flights’ obligation to complete certain services to the Arrivals Lands before transfer to Crystal Creek.

McGinn also advised that a Phase II environmental assessment was required. [ 44 ] On April 16, 2014, McGinn sent Vigneswaran a letter reflecting “our numerous recent discussions” and identifying what he referred to as four critical pre-funding conditions that remained outstanding: 1. An executed commitment letter had to be received by Sterling on or before 5:00 p.m. on April 20, 2015; 2. The Quantity Surveyor had to review a revised March 2015 budget and find it satisfactory; 3. The PSA had to be amended to reflect the changes mentioned above; and 4.

A satisfactory Phase II environmental report had to be provided. [ 45 ] McGinn stated, “Should the Borrower be unable to fulfill these conditions, our financing offer will be withdrawn, and the Borrower will be responsible for fees and costs.” [ 46 ] On April 27, 2015, Prosser wrote to Vigneswaran and Sathiya, demanding payment of the following amounts as “due and owing to the Lender by the Borrower under

Section 8 “Costs and Fees” of the Letter Agreement” and threatening legal action if these amounts were not paid: 1. $21,209.28 respecting legal costs [Dentons Canada LLP] 2. $8,804.25 respecting Quantity Surveyor [Tech-Cost] 3. $170,000.00 respecting Commitment Fees [Sterling Bridge Mortgage Corp]. D. Later Events [ 47 ] Sterling commenced litigation against Flights. Sterling sought, inter alia : (

a) Loan Costs/Fees Initial Fee of $170,000 less an Application fee of $10,000 pre-paid by Flights $160,000.00 Fee payable to Tech-Cost (Quantity Surveyor) $8,804.25 (

b) Legal Fees – Loan Documents $26,200.00 Accrued interest in respect of legal fees- loan documents to May 11, 2015 $11,753.42 Per diem for every day thereafter $53.42 Total: $206,757.67 (collectively, the “Disputed Amounts”) Plus costs on a solicitor and own client basis associated with collection of the Disputed Amounts. [ 48 ] Flights filed a Statement of Defence and a Counterclaim seeking, inter alia :

(

a) Relief pursuant to the Unconscionable Transactions Act , RSA 2000, c U-2 ( UTA ) from payment of amounts in excess of sums determined by the Court to be fairly due to Sterling; (

b) Refund of the $10,000 Application Fee; (

c) Damages for breach of the “Loan Agreement” in the amount of $2,000,000; (

d) Pre-judgment interest; (

e) Punitive or exemplary damages or, alternatively, aggravated damages in the amount of $500,000; (

f) Costs on a lawyer-client, full indemnity basis. [ 49 ] Flights advised at the commencement of trial that it was no longer pursuing the claim for $2,000,000. [ 50 ] Flights sought to sell the Lands to pay out the Alta West Mortgage. This required the mortgage registered in favour of Sterling to be discharged. Sterling refused to discharge that mortgage unless it was paid the Disputed Amounts. After Court appearances, funds sufficient to cover the Disputed Amounts were paid to Sterling’s lawyers in trust, pending resolution of this matter. III.

Issues [ 51 ] In its Statement of Claim, Sterling asserts that Flights is in breach of certain conditions set out in the First Commitment Letter: 15. Pursuant to the terms of the Loan Agreement, in order for the Loan to be advanced by Sterling all of the conditions set out in the Loan Agreement were required to be satisfied by FDC or waived by Sterling. As a result of the failure or inability by FDC and the Guarantors to satisfy all conditions of the Loan Agreement the Loan was not advanced by Sterling. Furthermore, the failure to satisfy all conditions constitutes a default under the Loan Agreement.

The conditions, which remain outstanding, include but are not limited: (

a) failure to satisfy or otherwise breach of paragraph 11(c)(

i) of the Loan Agreement; (

b) failure to satisfy or otherwise breach of paragraph 11(c)(iv) of the Loan Agreement; (

c) failure to satisfy or otherwise breach of paragraph 11(c)(xv) of the Loan Agreement; (

d) failure to satisfy or otherwise breach of

schedule “A” (

d) of the Loan Agreement; (collectively the “Default”). [ 52 ] I will refer to these conditions collectively herein as the “Four Conditions” and will discuss them in more detail infra . [ 53 ] In essence, Sterling alleges that Flights, having failed to meet the Four Conditions, is in breach of the First Commitment Letter and is therefore liable to pay the Disputed Amounts notwithstanding that the Loan was never advanced. It seeks extensive relief. [ 54 ] As noted above, Flights now has abandoned its claim for damages for breach of the “Loan Agreement”, though it continues to claim punitive damages.

Flights also argues that it should be relieved from any obligation to pay the Disputed Amounts. [ 55 ] Accordingly, the core task confronting me in this matter is the precise determination of the parties’ rights and obligations under the First Commitment Letter. IV. Analysis [ 56 ] A preliminary evidentiary issue requires consideration. At all relevant times, Sterling’s principal contact was McGinn. Virtually all correspondence initiated or received by Sterling involved McGinn. However, McGinn was not a witness at trial.

The Court was advised that the reasons for McGinn’s non-attendance were that his employment with Sterling had been terminated and that he was confronting medical issues. [ 57 ] At trial, Prosser was called to give evidence on behalf of Sterling. I find that Prosser was only peripherally involved in the negotiations between Sterling and Flights and it became apparent at trial that he had limited direct knowledge thereof. [ 58 ] Flights argues that Sterling had an obligation to produce McGinn and that I should draw an adverse inference from his absence at trial.

Flights contends that where Sterling’s evidence differs from Flights’ evidence, it should have had the opportunity to cross-examine McGinn. [ 59 ] Sterling asserts that McGinn is not in its exclusive control and that Flights also could have called him as a witness. Flights counters by noting that this is Sterling’s claim to prove. [ 60 ] I agree with Flights that McGinn’s absence from the trial and the lack of even a “will say” statement is troubling.

As will be discussed further infra , certain parts of Sathiya’s evidence are uncontroverted and, where that is the case, I accept that evidence. [ 61 ] With respect to Flights’ assertion that the contents of McGinn’s various emails are hearsay, Sterling argues that the business records hearsay exception applies. I note that the emails sent by McGinn on which Sterling seeks to rely were part of his duties and were sent to everyone. Further, Sathiya can authenticate most of them.

A. The Four Conditions [ 62 ] As noted above, Sterling asserts that Flights has breached what I refer to as the Four Conditions. Flights counters that all conditions and requirements imposed upon it by the First Commitment Letter, including the Four Conditions, were satisfied. [ 63 ] The first of the Four Conditions is set out in paragraph 11(c)(

i) of the First Commitment Letter, which provides that: The Borrower acknowledges that at no time shall the loan amount as a percentage of the value of asset security exceed 66% as determined soley by the Lender. [ 64 ] The second of the Four Conditions is set out in paragraph 11(c)(iv) of the First Commitment Letter, which provides that: A Phase I ESA for the Property, prepared by Curtis Environmental Engineering Inc., dated July, 2006, concluding that there is no negative environmental impact to the site.

Additionally, the Borrower will endeavour to obtain a letter of transmittal addressed to the Lender allowing them to rely on the findings of the report prepared by Curtis Environmental for use in mortgage financing arrangements. [ 65 ] The third of the Four Conditions is set out in paragraph 11(c)(xv) of the First Commitment Letter, which provides as follows: The Lender shall appoint a Quantity Surveyor (the “Monitor”) to review the development of the Property, and all reasonable costs associated therewith are to be the responsibility of the Borrower.

The Monitor will be entitled to access the Property and will review and confirm the budget as to accuracy and inclusion of all hard and soft development costs in accordance with the project’s specifications (the “Project Budget”). Should the final costs, as confirmed by the Monitor, be more than projected, the Borrower will inject additional equity into the project. [ 66 ] Finally, the fourth of the Four Conditions is set out in paragraph d) of

Schedule A to the First Commitment Letter, which provides as follows: The Borrower and the Guarantors (to the extent applicable), in addition to satisfying all of the other terms and conditions of the Loan, will execute and deliver all Loan and Security Documents as may be required by the Lender including, but without limitation, the following: ...

d) an assignment of all Purchase and Sale Contracts and the proceeds realized therefrom, including all deposits; [ 67 ] With respect to the first condition, as noted above, there was correspondence between the parties on March 23 and 24, 2015 discussing the Enmax Recoverable. McGinn indicated that Sterling could not advance funds to cover this expense because the resulting loan to value ratio would be too high. Flights would not agree to contribute the additional $527,000 required in respect of the Enmax Recoverable.

It argued that this amount represented a pre-payment by Flights in respect of the cost of installing shallow services and should be characterized as a credit to Flights as it would eventually get it back. I will discuss this item further in respect of the third condition. [ 68 ] With respect to the second condition, Flights was required to produce a Phase I Environmental Site Assessment (Phase I ESA) for the Lands that had been prepared by Curtis Environmental Engineering Inc. in July 2006.

The First Commitment Letter required that the report indicate there was no negative environmental impact to the site. [ 69 ] Flights produced the Phase I ESA fairly early on but it was arguably ambiguous.

It did not state that there were no negative environmental impacts to the site, but stated instead: Based on the information reviewed and/or available data and observation made during the visual site review, a Limited Phase II Environmental Assessment is recommended to confirm the environmental integrity of the subject property with respect to the potential on-site contaminants from the leaking of storage tanks and activities of Transportation Company located on the subject property. [ 70 ] Sterling took the position that a Phase II ESA was required if negotiations were to continue.

Flights notes that this request was not made until February 2015. Nevertheless, Flights commissioned a Phase II ESA, which was produced in June 2015 and stated: Based on the analytical results of the soils and groundwater, the Site has not been impacted by the previous site use for storage of above ground fuel storage tanks [ 71 ] By that time, however, Sterling had refused to continue with funding efforts and the parties had commenced litigation. Flights argues that it is not in default merely because Sterling ultimately did not want the Phase II ESA report.

It contends that Sterling is using the initial lack of a Phase II ESA as an excuse. [ 72 ] With respect to the third condition, Sterling argues that Flights failed to inject necessary equity into the Project as required. It points first to the Enmax Recoverable. As noted above, Flights argues that this is not a proper equity requirement as it would be able to recover this amount.

Nevertheless, Sterling takes the position that, even if it was recoverable by Flights at some future time, it was still a budget line item identified by the Quantity Surveyor and was required to be accounted for in any budget that would form the basis for financing. It was a cost to complete and needed to be funded within the overall Loan amount. [ 73 ] Sterling asserts that there was a difference of approximately $1,000,000 between Flights’ budget and that prepared by the Quantity Surveyor.

Despite meetings between Sathiya and the Quantity Surveyor in October, November and December 2014 and January 2015, no satisfactory budget was arrived at. Without a satisfactory budget, Sterling was not prepared to fund. [ 74 ] With respect to its alleged failure to inject additional equity, Flights claims it was prepared to put in an additional $600,000

from sale proceeds of the Wexford property. This was changed by McGinn from the original amount of $500,000. [ 75 ] The fourth condition required Flights to assign to Sterling all purchase and sale contracts and the proceeds realized therefrom, including all deposits. Sterling asserts that Flights did not produce the executed PSA between it and Crystal Creek that satisfactorily addressed the issue of deposits. Flights disputes that allegation. [ 76 ] On December 10, 2014, Flights provided Sterling with the first Crystal Creek PSA.

Subsequently, however, the deal was changed to require Flights to incur the cost of servicing certain lots acquired by Crystal Creek. This change appears to have been imposed by Sterling, but no explanation for it was provided. Sterling also required the agreement to be amended to provide for deposits paid by Crystal Creek to be held by its solicitors for release to Flights’ solicitors on closing. Sterling denies Sathiya’s assertions that Sterling’s pre-existing relationship with Crystal Creek explains why Sterling insisted on this re-deployment of deposits.

Eventually, Sterling demanded that these deposits be dedicated to Flights’ newly acquired responsibility to service the lots sold to Crystal Creek. Flights provided the revised PSA to Sterling, but it did not say that deposits were immediately releasable. However, in an email exchange on March 19, 2015, the president of Crystal Creek confirmed that the deposits would be releasable. [ 77 ] Sterling argues that it was not comfortable with the additional costs included in the amended PSA.

That may be, but I am satisfied that the amendments Sterling demanded to the PSA were not contemplated in the First Commitment Letter and were not agreed to by Flights. [ 78 ] Flights argues that the alleged breaches of the Four Conditions were not defaults under the First Commitment Letter. It asserts that all conditions and requirements imposed upon it under the First Commitment Letter, including the Four Conditions, were satisfied by the time a mortgage in favour of Sterling was registered against the Lands.

Flights claims that the alleged breaches were manufactured by Sterling in an attempt to deflect attention from its inability to fulfill its obligations to advance funds to Flights because it could not syndicate the Loan. [ 79 ] I would not go that far. Rather, I believe that Sterling has mistakenly characterized the Four Conditions as positive covenants on Flights’ part. Instead, I am of the view that they were conditions precedent to funding.

They may not have been satisfied, but they do not amount to breaches of the First Commitment Letter. [ 80 ] Therefore, I do not find that Flights was in breach of the First Commitment Letter. B. Status of the Parties’ Agreement [ 81 ] As early as October 17, 2014, the parties were confronted with the prospect that they would not be able to conclude financing arrangements on the terms contemplated in the First Commitment Letter. It is common ground that Sterling did not have underwriting for the Loan secured by October 31, 2014.

Therefore, the failure to fund the Initial Advance by that date cannot be said to have been due exclusively to non-compliance by Flights. [ 82 ] As noted above, Sterling’s ability to syndicate the Loan was described in

section 16 of

Schedule D to the First Commitment Letter as a condition precedent to its obligation to fund the Loan. When it became clear that Sterling could not syndicate the Loan by the Commitment Expiry Date, it had the option to give Flights written notice that it intended to void the Commitment. It did not do so. Nor did the parties amend the First Commitment Letter. Instead, they continued to negotiate, raising the question of what the parties’ obligations were at that point. [ 83 ] The term “Commitment” is not defined in the First Commitment Letter.

It is unclear if it was meant to refer to the parties’ respective obligations or only to Sterling’s offer to lend money on certain terms and conditions. Consequently, it is unclear what provisions, if any, of the First Commitment Letter survived the passing of the Commitment Expiry Date. [ 84 ] Sterling takes the position that the terms of the First Commitment Letter extended beyond the Commitment Expiry Date and that Flights’ obligations were carried forward into the subsequent negotiations.

Thus, if Flights failed to fulfill the conditions in the First Commitment Letter, it was in breach. [ 85 ] Sterling takes the position that if negotiations were to continue after the Commitment Expiry Date, the changes it required to the terms of the First Commitment Letter were merely an extension of the Commitment.

In Sterling’s words, the Commitment was a “moving target”. [ 86 ] To put it another way, Sterling argues that the parties’ first agreement did not come to an end as they tried to negotiate a second loan and that the Second Commitment Letter was really just an extension of the First Commitment Letter. [ 87 ] Flights argues that Sterling is being facile and is attempting understate the significance of the changed terms in the Second Commitment Letter by arguing that the deal was evolving and the terms of the Commitment should be expected to evolve also. [ 88 ] Flights points out that, by the end of January 2015, Sterling was attempting to make a deal work with Trez Capital as the syndication partner.

It is clear from Trez Capital’s letter to Sterling dated February 18, 2015 that it was dictating the terms of the Second Commitment Letter, including a different interest rate, a higher initial fee and a longer Loan term. Trez Capital demanded an increase in the “commitment fee” from $170,000 to $299,000, of which its share would be $99,000. Flights complains that Sterling could have taken this amount from its share of the previously agreed Commitment Fee. Instead, Sterling purported to add Trez Capital’s share to the Commitment Fee payable.

This created financial stress for Flights. [ 89 ] Flights could not, and did not, agree to the terms of the Second Commitment Letter. It argues that, even if the only difference between the Second Commitment Letter and the First Commitment Letter had been a requirement for additional equity from Flights, Flights reasonably could have been expected to have a problem with that.

[ 90 ] Sterling contends that Prosser’s letter of April 27, 2015 simply demanded payment of amounts owing. It neither purported to terminate the First Commitment Letter nor was intended to nullify the Commitment retroactively. [ 91 ] I find that Prosser’s letter did not need to terminate the First Commitment Letter or the Commitment. Rather, the Commitment ceased to be operative when the parties set out to negotiate a new agreement on different terms. [ 92 ] In my view, when the conditions precedent in the First Commitment Letter were not met by the Commitment Expiry Date, the Commitment lapsed.

While Sterling did not expressly exercise its option to declare the Commitment void, it sought to negotiate changes to the terms of the Commitment, implicitly manifesting an intention not to be further bound by the First Commitment Letter. [ 93 ] Clearly, what Sterling proposed in the Second Commitment Letter was very different from the deal Flights had agreed to in the First Commitment Letter.

This is made clear by Flights’ refusal to agree to the terms of the Second Commitment Letter. [ 94 ] Sterling argues that I cannot rewrite the parties’ contract: Keephills Aggregate Co v Riverview Properties Inc. , 2011 ABCA 101 . That is certainly true, but my task is to attempt to interpret and give meaning to the parties’ agreement in a manner that makes commercial sense.

I find that it would be contrary to commercial sense to conclude that Flights’ obligations under the First Commitment Letter carried forward into the negotiations after the Commitment Expiry Date, particularly when the parties never arrived at a new agreement. C. Liability for Payments [ 95 ] How, then, does this affect Flights’ obligation to pay the Disputed Amounts?

Did Sterling, after it became clear that the terms of the Loan had been changed, still have the right to insist that Flights pay the costs and expenses contemplated in the First Commitment Letter? [ 96 ] I will address first whether Sterling is entitled to payment of the Initial Fee. [ 97 ] It is common ground that Sterling waived payment of the Initial Fee upon execution of the First Commitment Letter. At issue is whether McGinn assured Flights that it would not have to pay the Initial Fee at all if no advance was ever made under the Loan.

That was Sathiya’s evidence and, since McGinn did not testify, her evidence is uncontroverted. [ 98 ] Flights argues that, because Sterling waived payment of the Initial Fee upon execution of the First Commitment Letter and communicated its willingness to defer that payment until the Initial Advance, Flights is entitled to resist payment on the basis that no advance was ever made.

In other words, Flights argues that Sterling’s waiver of payment of the Initial Fee on execution of the First Commitment Letter made that payment contingent on the Initial Advance. [ 99 ] Sterling disputes that its waiver made the Initial Fee payable only in the event of an Initial Advance. It argues that the Initial Fee remained payable and that it was simply attempting to work out a deal that would allow Flights to pay the Initial Fee from the Initial Advance.

It asserts that the exercise of its discretion to allow the Initial Fee to be paid at the time of the Initial Advance does not mean that it is not still payable. Sterling argues that it is merely a timing issue. [ 100 ] In my view, it is more than a timing issue. The central issue is whether the obligation to pay the Initial Fee, having been deferred to the date of the Initial Advance, continues to be payable at all when no advance was ever made and when the understandings set forth in the First Commitment Letter changed and were never finalized. [ 101 ] There is some logic to Flights’ position.

A borrower whose lender has granted such an accommodation might reasonably expect not to have to pay the fee unless it actually draws down on a loan. As noted above, clause 8.

b) of the First Commitment Letter provides that “The Lender may in its sole discretion allow the Initial Fee to be paid at the time of making the Initial Advance to the Borrower, and is in addition to the Expenses.” Arguably, the effect of this is that an amount otherwise payable upon execution of the First Commitment Letter becomes only conditionally payable. [ 102 ] As set out above, clause 8.

b) goes on to make the Initial Fee absolutely payable in two circumstances. The first is if Sterling’s due diligence proved unsatisfactory to it. There was no evidence that this was the case. The second is if Flights or the Guarantors failed to fulfill their obligations under the First Commitment Letter or the other Loan and Security Documents. [ 103 ] Further, clause 8.

b) provides that the Initial Fee is payable in certain, more specific circumstances, namely: (

a) Flights has not requested or received the Initial Advance by the Commitment Expiry Date due to Flights’ failure or inability for any reason whatsoever to comply with any terms or conditions of the First Commitment Letter. (

b) Flights fails, refuses or is unable to comply with any of the terms and conditions set forth in the First Commitment Letter and/or in the Loan and Security Documents. [ 104 ] I agree with Flights that, if these apparently contradictory provisions regarding payment of the Initial Fee create an ambiguity, the contra proferentem rule suggests that such ambiguity should be resolved in favour of Flights. [ 105 ] The fact that Sterling considered it necessary to clarify in clause 8.

b) that certain occurrences would render the Initial Fee payable confirms my view that Sterling could and did exercise its discretion to waive payment of the Initial Fee. It would have been unnecessary to specify circumstances rendering the Initial Fee payable if execution of the First Commitment Letter was the only pre- condition to Flights’ obligation to pay it on demand. [ 106 ] Sterling also argues that Flights was obliged to pay the Initial fee if it breached the pre-funding conditions in the First Commitment Letter. What actually happened, however, was that Flights agreed to pre-funding conditions that Sterling later sought to

change and the parties failed to achieve consensus. [ 107 ] In my view, Sterling’s insistence on a higher Initial Fee under the proposed Second Commitment Letter is antithetical to the argument that Flights remained liable for the Initial Fee payable under the First Commitment Letter.

Shortly put, Sterling cannot claim a fee negotiated under one set of arrangements when it later insisted on different arrangements. [ 108 ] In the result, I find that Flights is entitled to return of the $160,000 Initial Fee described in the First Commitment Letter. [ 109 ] My view on the $10,000 Application Fee is different. [ 110 ] Flights argues that it should be entitled to a refund of the Application Fee because Sterling could not come up with the required funding. [ 111 ] As with the Initial Fee, the terms of the First Commitment Letter governing the Application Fee are somewhat contradictory.

Clause 8 refers to it as a “non-refundable Application Fee” but goes on to state that “The Application Fee, however, will be refunded should the Lender not be able to subscribe monies sufficient to meet the funding requirements of the Loan.” [ 112 ] This provision does not refer to a specific date by which Sterling had to have secured sufficient monies to meet its various funding obligations under the Loan. However, clause 11.

b) required Sterling to make an Initial Advance and a Development Advance. Flights would have me draw an adverse inference from the fact that Sterling could not fund by the September 30, 2014 deadline. I decline to do so. Clause 11.

b) i) provides only that the Initial Advance was only “expected to be on or before September 30, 2014”. [ 113 ] Further, Sterling would have been able to secure sufficient funds if the parties had finalized the Second Commitment Letter. Flights has not established to my satisfaction that Sterling could not have secured sufficient funds. [ 114 ] In addition,

section 16 of

Schedule D to the First Commitment Letter relieves Sterling of liability for its failure to syndicate the Loan. [ 115 ] In my view, the Application Fee was payment for the right to apply. Unlike the Initial Fee, payment of which I find was inextricably linked to the terms of the Loan as set out in the First Commitment Letter, Flight’s obligation to pay the Application Fee was not dependent on the terms ultimately negotiated.

Moreover, Sathiya, on behalf of Flights, understood that the Application Fee was non- refundable. [ 116 ] Accordingly, Sterling is entitled to keep the $10,000 Application Fee pre-paid by Flights in order to move forward with discussions. [ 117 ] Moving on to the other Disputed Amounts, Flights acknowledges that the Quantity Surveyor’s charges is properly payable by it. [ 118 ] With respect to the legal fees, Flights acknowledges that the $4,600 invoice of January 31, 2015 (the “1 st Invoice”) is payable by it under the First Commitment Letter.

Those fees relate to preparation of documentation, review of the First Commitment Letter and registration of security. [ 119 ] Flights notes that Prosser admitted under cross-examination that the invoice of November 23, 2015 (the “2 nd Invoice”) related to Sterling’s interactions with Trez Capital. The parties appear to agree that Flights should not be required to pay this amount. [ 120 ] Flights argues that it should be responsible for proper fees and expenses only to the end of January 2015.

It argues that, by the beginning of February 2015, Sterling would have known and should have notified Flights that it would not be able to meet its funding obligations under the First Commitment Letter. [ 121 ] Flights refers to Prosser’s demand letter of April 27, 2015 containing a demand for payment of legal fees in the amount of $21,209 from Dentons. Flights argues that, as of that date, Sterling had not incurred those fees. I was provided with no evidence as to WIP on Dentons’ books at that time.

In his testimony, Prosser was not sure where that number came from. [ 122 ] Flights also notes that, between April 27 and May 13, 2015, Sterling incurred no additional legal charges. Nevertheless, Sterling demanded another $5,000 from Flights. Additionally, Sterling demanded accrued interest on legal fees it had not incurred. Flights would have me draw the inference that Sterling was demanding payment it was not entitled to receive. [ 123 ] Sterling’s June 2015 Statement of Claim included a claim for $26,200 in legal fees, but there was no indication that these fees had been incurred for loan documents.

Flights claims that Sterling knew it was not entitled to this amount and attempted to conceal the details of it. [ 124 ] Sterling claims it did not initially disclose the details of its legal invoices because they contained privileged information. It disclosed the invoices once ordered by this Court to do so. [ 125 ] The two invoices disclosed by Sterling added up to exactly $26,200. Flights argues that this is too coincidental to be believed and notes that deductions were made from the second invoice so that they would add up to exactly $26,200.

Flights would have me draw the inference that these amounts were not actually incurred by the time of the invoices and that Sterling manipulated its accounts from Dentons to conceal charging for work not actually done. D. Flights’ Claims [ 126 ] In addition to the amounts discussed above, Flights in its Counterclaim sought relief pursuant to the UTA , damages, punitive

damages and solicitor-client full indemnity costs. As noted above, it subsequently abandoned its claim for ordinary damages. [ 127 ] With respect to unconscionability, Sterling argues the terms of the First Commitment Letter, namely the Application Fee, the Initial Fee, expenses plus interest at 9.5%, are not harsh or unconscionable. [ 128 ] Moreover, Sterling argues that there was no power imbalance between the parties and that there must be inequality of bargaining power to ground unconscionability: Uber Technologies Inc v Heller , 2020 SCC 16 .

An agreement with an experienced borrower should not be set aside for unconscionability absent fraud or misrepresentation. Sterling argues that Flights was experienced and notes that Sathyia used to work as a mortgage underwriter. [ 129 ] Sterling further argues that key terms of the First Commitment Letter such as loan value and interest rate were either proposed by Flights or discussed between Sterling and Flights. It asserts that Sathiya originally had no difficulty with the terms Sterling proposed. [ 130 ] In

summary, Sterling argues that the UTA does not apply. There was in this case no criminal rate of interest or knowledge imbalance and the terms were negotiated by sophisticated parties. [ 131 ] Contrary to Flights’ assertion, Sterling argues that its requests cannot constitute a penalty clause because such clauses arise only upon breach of a contractual provision.

Here, the obligations to pay fees and expenses were express terms of the First Commitment Letter that did not arise only upon breach. [ 132 ] Sterling argues that cases cited by Flights regarding commitment fees and changes to agreements ( Terrafund Financial Inc v 569224 BC Ltd , 2000 BCSC 1719 and Abba Ventures Inc v Royal Trust Corp. of Canada (1996), 176 NBC (2d) 33 (QB)) are both trial court decisions from other jurisdictions that have been little cited. [ 133 ] I conclude that the UTA does not apply on these facts. [ 134 ] Flights seeks punitive damages in respect of Sterling’s pre-lawsuit conduct, arguing that they are justified by Sterling’s demands for amounts not properly payable to it. [ 135 ] Sterling points to the distinction I drew in Patel v Chief Medical Supplies Ltd, 2021 ABQB 355 between costs and damages.

Damages are awarded in respect of conduct that gave rise to a cause of action. It also argues that punitive damages are exceptional and should be ordered with restraint. Citing Whitten v Pilot Insurance Co , 2002 SCC 18 , Sterling contends that punitive damages are appropriate only where there has been high-handed, oppressive conduct, which is not the case here. It argues that even if it breached the First Commitment Letter, it did not do so maliciously and there is no evidence of bad faith. [ 136 ] Flights’ request for punitive damages is denied.

I do not find Sterling’s pre-litigation conduct to warrant such an award. I think Sterling wanted to save this deal. While it may not have been as forthcoming with Flights as it should have been, I do not think it acted with malicious intent. [ 137 ] Flights argues that the alleged manipulation of legal accounts amounts to litigation misconduct sufficient to justify its claim for solicitor-client full indemnity costs. Flights also argues that Sterling hindered, delayed and confused the proceedings, forcing Flights to exhaust all legal grounds to get what it was entitled to have.

Flights alleges that there were many requests for extensions for no particular reason. It asserts that Sterling’s lawyers delayed so long in endorsing orders granted that Flights had to apply for a fiat. Flights had to bring an application to get Prosser to answer undertakings. Sterling opposed Flights’ request to amend its Counterclaim to remove the claim for $2,000,000 in damages. Flights had to apply to set this matter down for trial.

All of this, Flights argues, justifies solicitor-client full indemnity costs. [ 138 ] Sterling argues that solicitor-client costs are awarded only in exceptional cases and require misconduct during litigation. It argues that its unwillingness to discharge mortgages over the Land and its refusal to provide invoices when requested do not rise to the level of litigation misconduct. [ 139 ] Sterling refused to discharge its security because it wanted to get paid and asks why it would discharge that security when it was being sued for $2,000,000.

It asserts that the need for Court intervention to resolve a dispute does not amount to litigation misconduct. [ 140 ] As noted above, Sterling claims it did not initially disclose the details of its legal invoices because they contained privileged information. It disclosed them once ordered by this Court to do so. It asserts that it was entirely appropriate for it to appeal the direction to produce unredacted invoices. Sterling argues that it did not do anything deceitful. It merely waited for the Court to tell it what to do.

It now admits the requests for reimbursement of costs associated with its engagement with Trez Capital were incorrect. [ 141 ] I do not find Sterling has been guilty of litigation misconduct. It sought to protect its security in respect of amounts it claimed to be owed. It should not be punished for taking those steps. Neither do I find that the need to bring disputes between the parties to the Court for resolution rises to the level of litigation misconduct. Flights’ application for solicitor-client full indemnity costs is denied. V.

Disposition [ 142 ] In the result, I find that Flights is liable for payment of the $10,000 Application Fee, but is not responsible for payment of the $160,000 Initial Fee. Flights is not responsible for costs, fees and expenses incurred by Sterling after January 31, 2015. [ 143 ] Flights is responsible for the payment of the 1 st Invoice. It is also responsible for payment of the Tech-Cost Consultants Ltd. (Quantity Surveyor) fee. [ 144 ] I direct the parties to provide me with a recalculation of amounts held pursuant to the Robertson Order of November 5, 2015,

amounts to be returned to Flights in accordance with this Judgment and amounts to be retained by Sterling. [ 145 ] I further direct the parties to provide me with their respective computations of interest to be paid by and to each of them as a consequence of the terms of this Judgment. [ 146 ] Flights’ applications for relief under the UTA , for punitive damages and for solicitor-client full indemnity costs are denied. [ 147 ] If the parties cannot agree on costs, they may make written submissions to me within thirty days of the date of this decision.

Heard on the 18 th day of October, 2021 to the 22 nd day of October, 2021. Dated at the City of Calgary, Alberta this 15 th day of December, 2021. C.M. Jones J.C.Q.B.A. Appearances: Steven A. Latos Dentons Canada LLP for the Plaintiff Matthew X. James James & McCall Barristers for the Defendants